If you’re in the process of shopping for a new home and a mortgage loan, you’ve probably heard about PMI, or private mortgage insurance. PMI is not required for every borrower but it can be of benefit to some. If you are wondering whether or not you need private mortgage insurance, read on! Knowing what PMI is and who it benefits can help you decide whether or not you really need it.

What is PMI?

Private mortgage insurance is security for the lender. If you’ve not put 20 percent down, you have no equity in your new home. If you should default on your loan, your lender will take a loss. With PMI, the lender is protected should you lose your home before you have built a proper amount of equity. Should you default on your loan, your lender will be reimbursed, in part, by the insurance company.

How Much Will It Cost?

PMI payments are built into your monthly mortgage payment. The average policy is calculated at one-half percent of the total amount of your loan. Your PMI will be spread over the life of your loan and you’ll pay monthly. You can reasonably expect to pay between $50 and $150 extra each month that you carry a private mortgage insurance policy.

Do I Have to Pay PMI?

Your home loan lender may have options available to you to help you avoid paying PMI but, if they don’t, the easiest way to avoid it is to put 20 percent down. This may mean that you have to purchase a less expensive home, borrow the 20 percent from friends or family or even wait to purchase a home until you have saved enough for a sizable down payment. If you are unable to put at least 20 percent towards the purchase of your new home, you’ll need to pay PMI.

Will I Pay PMI Forever?

Once you have made your mortgage payments and you have 20 percent equity, you can request that your PMI be cancelled. Once you have built 22 percent equity, your lender will automatically cancel your PMI. According to federal law, your lender must remind you of your right to cancel PMI every year and explain the process to you once you become eligible.

How Does PMI Benefit My Family?

It’s obvious that PMI has the most benefit for the lender but it also benefits many families. Without PMI, people would have to wait for years before they could purchase their first home, having to save for a 20 percent down payment. Thanks to PMI, home buyers can purchase a home with little to no down payment. This is of extreme benefit to families who can afford monthly mortgage payments but don’t have the means to save tens of thousands of dollars to use as a down payment.

If you are interested in purchasing your first home, knowing whether or not PMI will benefit your family is important. If you have more questions regarding private mortgage insurance, be sure to speak to your mortgage broker or lender. While private mortgage insurance isn’t necessary for all home buyers, it is necessary for many who desire a new home sooner rather than later.

Guest author Carol Seiler is an insurance claims adjuster and freelance blogger writing on behalf of ppiclaims.org.uk.